Small-scale bribery is endemic in many business cultures. Can it be stopped? And if it was, would it make any difference?

 

Small-scale bribery is endemic in many business cultures. Can it be stopped? And if it was, would it make any difference?The tide is turning against facilitation payments, once widely accepted as just a cost of doing business. Some companies have a zero-tolerance policy, while others ban payments in all situations apart from where the health or safety of an employee and his family might be threatened. In some companies, managers discourage facilitation payments, but do not explicitly forbid them.

The situation is complicated further by differing approaches from country to country. Although predominantly outlawed in developed nations, the UK, Australia, New Zealand, the US and South Korea allow companies domiciled within their borders to make facilitation payments abroad under certain circumstances.

But to some critics of the practice there is simply no difference between a facilitation payment and an outright bribe.

Alexandra Wrage is president of non-profit anti-corruption advocacy group Trace International. She says the term facilitation payments has become a euphemism for bribes, and they have no place in today’s business world.

Simon Webley, research director at the Institute of Business Ethics (IBE), shares this view. “Businesses that take their values and ethics seriously will not tolerate facilitation payments irrespective of the law, simply because they are unethical,” Webley says. Although objections to them might be in the ethical rather than legal domain, “any distortion of a relationship where, for instance, money is exchanged and you can’t produce a receipt for it generally means someone else is the loser”, he adds.

Trace published a survey in October that finds a clear trend of companies banning facilitation payments, and growing awareness of the risk and complexity presented by them.

If there is a distinction between a bribe and a facilitation payment, a bribe is the broader term for any payment that gains business advantage, whereas a facilitation payment specifically buys freedom from red tape, speeding up access to services.

Wrage gives the example of two cargoes of bananas owned by competing companies waiting for customs clearance in a port. The company paying customs to be processed ahead of its competitor will gain business advantage by getting its bananas to the market first. Its competitors’ will probably rot.

“Lurking beneath any one of these payments is a business advantage. If the company is prepared to pay, then that would be because there is a business advantage in there somewhere,” Wrage says.

Transparency International senior adviser Peter Wilkinson says that defining facilitation payments is extremely problematic. “It is perhaps easier to distinguish between those payments that are made as extortion, with threats to physical wellbeing – and you can’t really call them bribes, they are muggings, robbery and violence – and simply making a payment to jump the queue.”

TI passed a resolution at its 2007 annual members’ meeting opposing facilitation payments of all kinds. “The insidious effect of facilitation payments cannot be exaggerated,” Wilkinson says, pointing to Kenya as an example, where TI has found that the culture of paying small bribes adds 25-30% to the cost of living.

A slippery slope

Once companies begin to make facilitation payments to gain business advantage, it often prompts expectation they will continue to do so, creating all kinds of problems. “Once a practice becomes tolerated for what appears to be a good reason, that is the beginning of the slippery slope,” Webley says.

Often companies justify such payments abroad by saying the official who is benefiting from the payment is poorly paid and his or her family depends on it.

Webley says: “Essentially you have got to deal with what are called the ‘small ethics issues’. The big ones get all the publicity, but it is the small ones – when you do something that is against the basic culture of the organisation but it is let go for whatever reason – that undermine the culture.”

Word soon gets out on which companies are prepared to play the game and which are not, Wrage says. The only winners are the government officials, and the companies end up looking like “patsies”.

“In the end we are not talking about small amounts of money. Extortionate officials will keep coming back to the well. You end up in the middle of these pyramid schemes, which turn out to be phenomenally expensive,” she says.

The Organisation for Economic Cooperation and Development has two instruments to fight bribery and corruption, a legally binding convention and its Recommendation of the Council on Combating Bribery in International Business Transactions.

In what Mark Pieth, chairman of the OECD’s working group on bribery, tells Ethical Corporation was a “high-level decision”, the OECD is this month amending its recommendation to embrace facilitation payments.

“Up to now the OECD was reluctant to bring in facilitation payments,” Pieth says, speaking ahead of the official publication of the guidelines, “not because we felt companies shouldn’t find a way of dealing with them, but we felt it was something for the private sector.”

In the past the OECD has been reticent about tackling this area because some countries, such as the US with its Foreign Corrupt Practices Act, are reluctant to change their criminal laws.

“Let’s acknowledge the problem, let’s reduce it by saying genuine facilitation payments are just one-off and then encourage companies and countries to find ways to solve the problem. But it doesn’t come out with zero-tolerance,” Pieth argues.

Confused? Then ban

Because of the complexity of the issues surrounding facilitation payments and the grey areas around their definition, some multinational companies have taken the plunge and forbidden staff from making them. Rio Tinto is one of these.

“Rio Tinto doesn’t need to distinguish facilitation payments from bribes because company policy is to prohibit both,” the company says.

“Our policy on facilitation payments applies to Rio Tinto staff worldwide and is the same wherever we operate. We believe it corresponds with global best practice.”

In 2002, John Browne, BP chief executive at the time, announced a company-wide policy change to prohibit facilitation payments. Now it is part of BP’s code of conduct – a zero-tolerance policy – says Sheldon Daniel, BP’s director of corporate responsibility.

“Business units set up projects led by local champions in the countries where facilitation payments were known to exist. Action plans were implemented to eliminate these payments before the year-end,” Browne said in 2002. “Payments to tax authorities to speed up refunds, to police to tackle counterfeiting, and to local authorities for planning permits, have been stopped without a significant impact on our business.”

But TI’s Wilkinson dismisses some of the corporate statements on facilitation payments as extremely ambiguous. “In practice they prohibit facilitation payments, but say ‘if you have to pay them consult your legal counsel’. There are about six to eight ways of saying these types of things are off-limits.”

A de facto ban

Although five OECD countries permit facilitation payments in theory, in practice most local laws and regulatory codes effectively mean there is a de facto ban in place.

Simon Longstaff, executive director of Australia’s Saint James Ethics Centre, says that although facilitation payments are not expressly banned, the way Australian law is drafted means the conditions in which they are defensible are very limited.

In Australia bribery is a crime, although there are two defences: if the payments made are not illegal in the recipient’s country; and if the payment is defined as a facilitation payment, ie of nominal value, paid to a foreign official for the sole purpose of expediting a minor routine action, and documented as soon as possible.

Peter Haig, senior associate at Melbourne-based corporate lawyers Arthur Allens Robinson (AAR), says that while legally there may be no barriers to outlawing facilitation payments, the problem is one of commercial reality.

Haig says that in countries where facilitation payments are endemic, such as China with its culture of “guanxi” or personal influence, there is an argument that “outlawing them would grind their business to a standstill, or at least put them at a commercial disadvantage to those companies from countries – such as the US – that allow facilitation payments”.

In the US, the Foreign Corrupt Practices Act is the predominant legislation governing bribery. The same two defences against allegations of bribery exist in the US as in Australia: a payment is not a bribe if it is legal in the recipient’s country; and a facilitation payment is also not considered to be a bribe. But unlike Australia, the US does not make reference to small or minor when defining facilitation payments, which the OECD identifies as a flaw.

Investor pressure

In Trace’s updated 2009 report – The High Cost of Small Bribes – Katarina Litvak, head of governance and sustainable investment at F&C Asset Management, says the recent avalanche of corporate corruption scandals and the implosion of the global financial system have taught investors that ethics and governance drive value.

“What it has really done is presented investors with a thorny challenge: how to get beyond the policy statements and get a true sense of a company’s governance culture,” she says.

For institutional investors, facilitation payments, especially where they are outlawed but tolerated, present clear risks to their holdings in companies.

Natacha Dimitrijevic of Hermes Equity Ownership Services says: “Being a universal owner it is in our direct interests to have best practice applied at each and every company.” A “universal owner” is typically an institutional investor with a wide range of investments held for long-term growth and return.

Hermes believes facilitation payments should be banned. Where they do continue, the London-based investor advisory service requires properly drafted policies that are deeply entrenched in company culture.

Hermes has been influenced by the 2008 Woolf report, the result of an independent enquiry into allegations that BAE Systems had engaged in bribery and corruption to win contracts. The report recommends forbidding facilitation payments as a matter of global corporate policy, but acknowledges that this might not be possible in some countries.

Management and employees in such countries need to be supported to ensure all such payments are recorded and reported to senior executives and measures developed to eliminate them over time, the Woolf report states.

“Hermes often uses this report to communicate best practice to companies we engage with,” Dimitrijevic says. “The main issue on corporate culture is that we believe it is one thing to have a policy as a starting point … but the processes and polices should be well integrated into the company.”

Dimitrijevic argues that senior management should be the key in communicating those policies. Because of this, “it needs to be clear that management will not allow corruption. It would be very difficult in those circumstances to keep an avenue open for facilitation payments.”

Any exceptions should be carefully thought through, Dimitrijevic says. “If a company has to make facilitation payments this should be reported, accounted for and approved by the company’s compliance team.”

Voluntary abolition

An increasing number of companies – like Rio Tinto and BP – are prohibiting facilitation payments entirely. Importantly there is increasing awareness that this is where the advantage lies.

“If you are a large company then your reputation goes before you,” TI’s Wilkinson says. “Your reputation is what you create and if you make it clear what you stand for the rest will follow.”

Employees too are seeing the advantages of prohibition. AAR’s Haig says behind the Trace survey results is a strongly held sentiment that employees would rather not have to make, let alone record in detail, decisions without “bright line” guidance as to what is legally permissible.

“It seems from the Trace results that many employees of corporations that do permit facilitation payments would be at least unflustered, if not relieved, should they be prohibited by law.”

There is a tension, though. If facilitation payments are truly endemic, then Haig poses the possibility of employees finding themselves out of work as their companies suffer. “This is the real tension, and one that will perhaps only be resolved when and if bribery in all its forms – including facilitation payments – is no longer viewed as a cost of doing business in some countries.”

Do you need backhanders?

According to a recent Trace survey:

• 76% of survey respondents believe it is possible to do business successfully without making facilitation payments given sufficient management support and careful planning.
• 70% of respondents believe that employees of their company either never, or only rarely, make facilitation payments, even if their corporate policy permits facilitation payments.
• 93% of respondents say their job would be easier, or at least no different, if facilitation payments were prohibited in every country.
• 44% of respondents say their companies prohibit facilitation payments or simply do not address them because facilitation payments are prohibited together with other forms of bribery.
• 60% of respondents say facilitation payments pose a medium to high risk of books and records violations or violations of other internal controls.
• 50% of respondents say a company is moderately to highly likely to face a government investigation or prosecution related to facilitation payments in the country in which the company is headquartered.

Source: Trace Facilitation Payments Benchmarking Survey (October 2009)

ICGN guidance for investors

The International Corporate Governance Network provides guidance to its members to look for facilitation payments in the companies they invest in.

“The ICGN believes that bribery and corruption are incompatible with good governance and harmful to the creation of value,” it says.

“It follows that shareowners and their representatives have a responsibility to demand that companies have stringent policies and internal systems to avoid bribery and corruption.”

The ICGN asks investors: “Does the policy address facilitation payments and detail the safeguards the company has taken to avoid abuses in this area?”